There are a few key principles in understanding what drives the returns of property investments within different real estate asset classes. The Global Wealth Group has assembled a principles-based guide on how investors can strategically identify quality real estate investment opportunities to maximise their wealth.
Understanding Real Estate Asset Classes:
The Global Wealth Group classifies the property universe into six core categories, namely Residential; Commercial Office; Industrial; Retail; Senior-Living; and Medical Office Buildings.
- Residential Real Estate is any property used as a place of dwelling, or residence. These include single-family homes, townhouses, apartments, condominiums, and multi-family units.
- Commercial Property represents any building in which commerce takes place. In rudimentary terms, Office Commercial Property comprises office parks and buildings, whilst Retail Property consists of shopping centers, grocery outlets, and regional malls.
- Industrial Properties can be classified as light or heavy industrial. These buildings can be used for manufacturing, processing, storing, or shipping products. Industrial Real Estate mainly comprises of warehouses, distribution centres, flex spaces, and storage facilities.
- Senior Living mainly refers to care-home facilities for the elderly, while Medical Commercial Property includes hospitals, medical offices, therapy centres, and campuses that house healthcare facilities and/or services. It is imperative to understand these different classifications of real estate, as each has its own set of dynamics and fundamentals driving its respective returns.
Strategically identifying the fundamental drivers of return within each Real Estate sub-asset class:
Residential Real Estate is largely affected by a geographical area’s macroeconomic climate and changing demographic factors. Since the demand, price, and future quality of housing in an area are largely dependent on household income, investors should look for the following strategic indicators when analysing the investment viability of a residential market:
- Strong GDP growth
- Strong real per capita income
- Above-average population growth
- Above-average new job rates
- Below-average unemployment rates
- Increasing rental prices in the area (as a leading demand indicator)
- Proximity to schools and economic centres
More affordable residential options lie within close proximity of established suburbs. If these established area’s growth spills over to these neighbouring suburbs, demand will soon drive up the value of residential properties in surrounding areas. Lifestyle changes due to Covid-19, are resulting in a trend whereby remote workers are relocating to residential areas further away from cities.
The demand for Commercial Office Real Estate remains uncertain due to the work-from-home policy that most companies have adopted. While redevelopment and repositioning can boost commercial value, ongoing construction activities in a specific area can result in an over-supply, which drives down rent and commercial property prices.
Although the pandemic significantly diminished the need for office space, we believe that there will always be a demand for Commercial Office to accommodate human interaction and collaboration. Social distancing created a need for larger office spaces to accommodate the same number of employees. This may increase the rent per capita square meter.
Retail Commercial Properties are facing challenges due to an increased shift towards e-commerce. This trend is fast-tracked by the contactless approach to shopping that Covid-19 has instilled.
Despite all future uncertainties that the retail sector holds, retail sales still contribute to economic growth, even if these sales occur online. We recommend identifying areas with above-average income per capita and GDP, as economic growth indicates increasing employment and subsequently, higher retail demand. We highly recommend that investors are selective in choosing their exposure to the Retail Commercial sector.
E-commerce is transforming Industrial Property. Green Street anticipates that 30% of all retail sales will occur online by 2030 as a result. While technology is triggering a declining physical retail sector, warehousing demand is on the rise.
Increasing e-commerce sales is set to cause a surge in the demand for logistics real estate distribution centers, which are mostly situated in the outskirts of metros and typically within proximity to airports. The increasing e-commerce trend may create value-add opportunities for seasoned real estate sponsors. The Global Wealth Group believes that investors can take advantage of the shift towards e-commerce by considering locations closer to population hubs, where last-mile delivery can be capitalized upon.
In-country specifics such as lower projected interest rates, and the insatiable demand for data and database analysis can also influence property prices. This often results in the emergence of non-traditional real estate avenues. Since facilities for cloud servers or data warehouses often occupy prime urban properties, a city’s productivity and growth rates can be valuable demand signals for longer-term investment opportunities. In addition, these alternative real estate avenues are typically less affected by the interest rate cycle. One can even take advantage of these ever-changing market trends by repositioning buildings, like old office blocks, to be used as storage facilities.
Senior Living and Medical Commercial Real Estate are largely dependent on the state of a country’s national health system and its aging demographics. Land usage patterns are often affected by:
- Above-average population growth
- An aging population (increased patient demand)
- Healthcare employment rates
- Medical expenditure
The Global Wealth Group strongly believes that these strategic drivers are valuable tools in assessing and identifying potential global property investment hotspots.
The less seasoned investor or those who feel they lack the necessary experience and in-depth knowledge of real estate investing, are advised to seek guidance from industry experts before making investment decisions. As real estate professionals are often well-connected and well-informed on current market trends, they are geared to help you find quality investment opportunities that best suit your personal investment needs, objectives, and risk appetite.